108 billion dollars. This number, too large to be apprehended, represents Africa’s annual infrastructure financing gap, and as revealed by a study conducted by the African Center for Economic Transformation (ACET) and Omdena, a data, it could grow to 1.7 (!) Trillion dollars over the next 20 years. years. According to the African Development Bank, energy infrastructure appears to be in greatest need of financing in Africa, followed by sanitation and transport.
The subject, despite the growing gap, is at the top of the priority list. Over the past two decades, several countries across the continent have expanded their basic infrastructure, including telecommunications networks and access to clean water, but overall development progress has remained limited. Today, Africa is the only region in the world where the density of the road network has decreased and where the power generation capacity per capita has hardly improved.
One of the main reasons for the growing gap is the inherent uncertainty in the region, as investing in Africa’s infrastructure remains, by any means, a risky business. Mckinsey notes that Africa’s track record in moving projects to financial close is poor, with around 80 percent of infrastructure projects failing at the feasibility and business plan stage. This represents Africa’s infrastructure paradox – there is a need and availability of finance, as well as a large pool of potential projects, but not enough money is being spent.
A risky adventure
The reasons for the paradox vary. Infrastructure development projects are a complex process that requires interface and coordination between several agencies, including financial, fiscal and legal, mainly based and managed outside the continent. Local entities often lack the budgets and capacities to design and implement large-scale infrastructure projects. A constantly changing regulatory environment and inadequate policy frameworks can call into question commitments to long-term projects and lead to poor prioritization and delays in obtaining licenses, approvals and permits. Most importantly, an excessive focus on risk avoidance as opposed to risk management and mitigation is a primary reason that many international investors avoid the region altogether.
But for those who choose to focus on the vast opportunity rather than the risks, Africa encompasses limitless opportunities.
Focus on impact
Over the past decade, innovative finance programs have been designed with risk mitigation as a major goal as it became increasingly clear that risk is a major concern holding back global investors and a major factor. which can be addressed by external funding agencies, unlike the inherent causes that are more difficult to mitigate.
One of these innovative programs that is becoming more and more substantial is results-based financing (RBF), an innovative system that focuses on development impact. This type of funding ensures that development funding is tied to previously agreed and verified results, and that funding is provided when results are achieved. Through a range of mechanisms, RBF helps to deliver development results, improves accountability and stimulates both innovation and efficiency, while mitigating the multiple risk factors that accompany the territory of infrastructure investments. in developing countries, and more particularly in Africa.
There are different types of RBF, each serving a different sustainability need. Anticipated market commitments offer a fixed quantity or price for a product or service over a relatively short period of time in order to stimulate a market reaction. Results-based aid (OBA) links the payment of public funds to the provision of products such as the provision of solar home systems. Service delivery is contracted out to a third party, which receives a subsidy to supplement the portion of user fees that poor households are unable to afford, with the results independently verified after service delivery and before the service is delivered. payment. Impact bonds are public-private partnerships that reward investors for successfully making an impact. There are other types of RBF, and they all come together under one effective roof; attract private investment in historically “unbankable” areas by putting in place effective incentives for service providers to reach underserved low-income households.
Empower communities and businesses
The main benefit of RBF is that it shifts financial risk away from the ability to pay of impoverished local communities, and puts it on a company’s ability to perform and deliver. By linking the disbursement of funds to actual results, local partners are both incentivized to achieve specific goals and given flexibility in how to achieve them, which encourages innovation and creativity.
A good example of the power of RBF across Africa is the off-grid solar energy sector. In the early years of solar home system deployment across sub-Saharan Africa, high up-front costs created significant affordability issues, creating an insurmountable financial hurdle for most last-mile families living in low-income homes. conditions of extreme poverty. By leveraging RBF, businesses across the region are able to reduce end-user costs, scale their operations faster, and create substantial impact.
One of the main agencies working in the RBF field is the GPRBA, a global partnership program within the World Bank Group that funds, designs, demonstrates and documents results-based financing approaches to improve delivery of funds. basic services in developing countries. The program has benefited 11 million people around the world to date and has provided $ 273.9 million in funding over its 17 years of operation. Other groups such as ENDEV, Sida and GIZ are all changing reality in Africa, Southeast Asia and Latin America, and providing millions of people with access to electricity, running water, health facilities, etc.
Some companies working in the region have recognized the vast potential and harnessed it to scale up their operations and connect millions more to sustainable solutions. Ignite has worked with major RBF investors and financiers across Rwanda and Mozambique, with additional pipeline deals across sub-Saharan Africa, and millions of people to be connected through these funding programs in the regions. years to come.
McKinsey’s analysis indicates that the current portfolio of infrastructure projects in Africa includes $ 2.5 trillion of projects that are expected to be completed by 2025, with RBF playing a major role, but to achieve the coveted SDGs of ‘By 2030, substantial funds and additional projects are needed. As a share of GDP, infrastructure investment in Africa has remained at around 3.5% per year since 2000, China spends around 7.7% of GDP and India 5.2%. In absolute terms, this would mean a doubling of annual investment in African infrastructure between 2015 and 2025, to $ 150 billion by 2025.
Appropriate, quality infrastructure enables societies to function and economies to thrive, making it the very heart of efforts to achieve the Sustainable Development Goals (SDGs). Mitigating the infrastructure paradox in Africa is the way to support the continent’s economic development, encourage the growth of its business sector and establish an inclusive reality for local communities.
The writer is an entrepreneur and investor, leading sustainable development companies in Africa and the Middle East